Germany Must Face Suit Over Hitler-Era Bond Default

By William McQuillen -
Aug 10, 2010

Germany must face a lawsuit over
bonds that defaulted under Adolf Hitler in the 1930s, a U.S.
appeals court ruled, saying the nation isn’t immune from the
claims and that American courts have jurisdiction to decide
whether the bonds are enforceable.

World Holdings LLC, based in Tampa, Florida, claimed it
owns a “significant number” of $208 million in bonds sold to
U.S. purchasers following World War I and has been rebuffed when
it sought repayment by the German government. The firm is
seeking “hundreds of millions of dollars” in the suit, said
Michael Elsner, an attorney for the investors.

Germany sold the bonds to finance rebuilding following the
conclusion of the war, according to court papers. By the mid-
1930s, after Hitler became chancellor, Germany had stopped
making payments on the bonds in the run up to World War II,
according to the ruling issued yesterday by the federal appeals
court in Atlanta.

“They decided from the ‘30s on that they were not going to
pay this debt,” Elsner said in an interview.

Gerald Houlihan, an attorney for the German government,
declined to immediately comment on the decision.

Under a 1953 treaty, the bondholder must show the bonds
were held outside Germany as of Jan. 1, 1945, to ensure
repayment. World Holdings claims the validation is unnecessary
for those who didn’t originally accept the terms of the London
Debt Agreement, also completed in 1953, which aimed to settle
most of Germany’s pre-World War II debt.

Worthless Bonds?

Germany counters that World Holdings hasn’t contacted the
country’s examiners with any request to validate the bonds. In
addition, the country claims the 1953 treaty precludes the
lawsuit in a U.S. court.

The three-judge panel said it may still eventually find
that World Holdings’ failure to comply with the validation
requirement could deem the bonds worthless.

“This is not a decision as to whether World Holdings’
bonds are, in fact, enforceable,” the court wrote. “We hold
merely that the district court has the authority to decide that
issue.”

Elsner declined to specify how much the firm is seeking,
saying there are questions of conversions, interest, and “bad
faith damages.”

Fair Value

“There are two sets of values for assets like this:
historical, collector value to scripophilists and claim value,”
said Amir Zada, director of Exotix USA Inc., which trades exotic
and illiquid emerging market debt.

The value would be based upon the level of past due
interest on the claim and also the increase in the price of
gold, Zada said.

“At this stage there is no typical OTC (over the counter)
market for these assets and therefore it is anybody’s guess as
to the fair value for an asset of this type,” Zada said.
“Ultimately it will be very interesting to see the outcome of
such a court proceeding.”

The case is World Holdings LLC v. The Federal Republic of
Germany, 09-14359, U.S. Court of Appeals for the Eleventh
Circuit (Atlanta). The lower court case is 08cv20198, U.S.
District Court for the Southern District of Florida (Miami).